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Monday, July 9, 2012

Borrowing cost of Spain hits bailout danger zone

Madrid, Jul 9 : Spain's borrowing costs rose to dangerously high levels today as finance ministers of the 17 countries that use the euro began to gather in Brussels to discuss terms of a rescue package for the country's stricken banks.
    The interest rate, or yield, on the country's 10-year bonds hit 7 per cent today morning, a level that market-watchers consider is unaffordable for a country to raise money on the bond markets in the long term and the point at which Greece, Ireland and Portugal all sought an international bailout.
    Stocks on Madrid's benchmark index fell 1.7 per cent. The yield later fell back down to 6.99 per cent.

    The yield indicates the interest rate a government would have to pay to raise money from financial markets when it holds bond auctions. While Spain can afford the high rates for a few weeks at least, it would find them too expensive in the longer term.
    Spanish officials had originally indicated that it would decide today how much the country's troubled banks would get from a USD 124 billion lifeline from other members of the 17-country eurozone. Spain's bank industry has been struggling since 2008 under the weight of toxic loans and assets following a collapse in the country's property market.
    But an official with Spain' economy ministry said last week that the meeting of eurozone finance ministers was not expected to generate a figure for how much Spain would tap.
    Ministers planned to discuss terms of the loan and may or may not finalise some of them at the evening session, said the official, who spoke on condition of anonymity in keeping with policy.
    Outside auditors are expected to complete rigorous assessments of Spanish banks by July 31. Separate stress tests will also be conducted on individual lenders banks to determine how much each bank needs to strengthen its balance sheets against further economic shocks if they can't raise capital on their own, the official said. These results are due to be published in mid-September.
    The Spanish official's comments reflect those made by a European official in Brussels last week, who said that no numbers for the overall loan amount would be coming out until bank-by-bank stress tests had been completed.
    The official added that one of the aims of Today's meeting would be to get a "political understanding" of the memorandum of understanding for Spain's loan so ministers could start paving the way in their countries to get the bailout approved. Spain's loan needs the green light from all 17 countries using the euro.

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